Here’s a scenario elder-law attorneys describe so often it’s practically a script.
Dad spends his last two years in a nursing home. The family can’t cover $115,000 a year, so he goes on Medicaid, and Medicaid pays.
Mom stays in the house. Nobody bothers her. She dies at 91. Six weeks later, a certified letter arrives addressed to the kids: The state wants to be repaid for Dad’s care, and the house is the only asset left.
The letter is legal. It’s federal. And most families have never heard of the program that sent it.
I’ve been a CPA since 1981, and I’ve been writing about money for more than 35 years. Medicaid estate recovery is the most consequential rule in retirement that almost nobody plans for. Here’s how it works, who it hits and five moves that keep the house in the family.
The law that makes states do it
Since 1993, federal law has required every state to try to get back what Medicaid spent on nursing-home care, home care and related hospital and drug costs for anyone who received that care at 55 or older. The money comes from the person’s estate after death.
That’s not optional. The statute says the state “shall seek adjustment or recovery from the individual’s estate.” States can go further and recover the cost of any Medicaid service, and 32 of them do, according to a 2024 survey by nonprofit KFF.
The rule that catches families is the timing. Recovery can happen, in the words of the law, “only after the death of the individual’s surviving spouse.” A widow keeps the house for as long as she lives. So the claim doesn’t die with the patient. It waits.
Whether the state can then reach into the widow’s estate depends on where you live.
Minnesota’s statute says that a claim against the estate of a surviving spouse who never received Medicaid “shall be payable from the full value of all of the predeceased spouse’s assets,” with the recovery limited to what was marital or jointly owned property during the marriage.
Other states stop at the first spouse’s probate estate and never look back.
Same facts, opposite outcomes.
Who pays
You’d assume a program that claws back nursing-home bills would be going after big estates. It’s the reverse.
The Medicaid and CHIP Payment and Access Commission, or MACPAC, the nonpartisan body that advises Congress, studied estate recovery in 2021. Its findings: Three-quarters of Medicaid recipients who died at 65 or older had a net worth under $48,500. Home equity is usually the biggest thing they leave behind.
The program collected $733 million in fiscal 2019, the most recent year with national data. That sounds like real money until you learn it was 0.55% of what Medicaid spent on long-term care that year.
Five states — Massachusetts, New York, Pennsylvania, Ohio and Wisconsin — accounted for about 40% of all collections, per KFF.
MACPAC’s conclusion was unusually direct for a government commission. It recommended Congress make estate recovery optional and bar states from pursuing “homes of modest value” or any estate worth less than a set threshold. Congress has done neither.
Why the house is the target
Medicaid pays for over 60% of the 1.2 million people in U.S. nursing homes, according to KFF. It’s the default payer because almost no one can self-fund $114,975 a year, the 2025 median for a semi-private room per CareScout’s Cost of Care Survey.
To qualify, you spend down nearly everything else first. But your home is exempt while you’re alive, up to a state-set equity limit — in 2026, at least $752,000 and as much as $1,130,000 depending on the state.
So the house is what’s left when the patient dies. Which is exactly why it’s what the state comes for.
One more change is coming. The 2025 tax law caps that home-equity exemption at a flat $1 million starting Jan. 1, 2028, with no inflation adjustment.
In the states that used the higher limit, homeowners with more equity than that will have to deal with it before they qualify at all.
Before you go — I write this newsletter the way I’d talk to a friend over coffee: honest, plain, and out to make you richer, not to sell you something. Sign up for the free Money Talks Newsletter. Free forever, and easy to quit if I ever bore you.
5 moves that keep the house in the family
None of these are loopholes. They’re written into federal or state law. The catch is that most of them have to happen before anyone applies for Medicaid, and some years before.
1. Know your state’s rules before there’s a crisis. Texas, for example, won’t pursue an estate worth $15,000 or less, or Medicaid costs of $5,000 or less, and it waives recovery on a home valued under $150,000 if the heirs’ income is modest.
Your state has its own list. Find it now, not after the letter arrives.
2. Use the caregiver-child rule. Federal law lets a parent transfer the home to an adult child who lived there for at least two years before the nursing-home admission and provided care that kept the parent in the home.
That transfer doesn’t trigger Medicaid’s penalty, and a house no longer in the parent’s name isn’t in the parent’s estate.
3. Mind the five-year lookback. Give the house away inside the 60 months before applying and Medicaid treats the gift as if you still own it, delaying eligibility. Irrevocable trusts have the same clock. This is why “we’ll deal with it when Dad gets sick” doesn’t work.
4. Ask for the hardship waiver — in writing, on time. Every state must have one; 49 use at least one hardship criterion, KFF found.
Typical grounds: The home is the sole income-producing asset, an heir lives there and would need public assistance without it, or the property is a working farm. Deadlines are short and vary by state.
5. Don’t let the executor pay anyone before the state. The claim is against the estate, not the kids personally. But an executor who distributes the house or the cash before resolving a valid Medicaid claim can be held liable. Settle the claim, or the waiver, first.
The bottom line
Medicaid is the insurance policy nobody bought on purpose, and estate recovery is the premium, collected from the people least able to pay it. A federal commission has told Congress as much. Until Congress acts, the defense is knowing the rules before you need them.
If a parent is heading toward long-term care, or you are, spend a few hundred dollars on an hour with an elder-law attorney in your state.
I’ve written about protecting assets before a nursing-home stay, and about what to do when long-term care insurance gets expensive. Both beat the certified letter.
Add a Comment